Determining Substantial Presence
The substantial presence test helps determine if nonresident foreign national employees should be treated as U.S. residents for income tax purposes. Here are the general rules and exceptions for determining substantial presence for residency.
Green Card Test
Under the green card test, the foreign national employee is treated as a U.S. resident for tax purposes if the Immigration and Naturalization Service issues them lawful permanent residency ("green card") at any time during the calendar year. The permanent residence status remains in effect until it is either rescinded or judicially determined to be abandoned.
Substantial Presence Test
General Rule
The substantial presence test is composed of two parts—the 31-day test and the 183-day test. The foreign national employee must be present in the U.S. for at least 31 days during the calendar year, and 183 days during the three-year period that includes the current year and the two previous years. The calculation for the 183-day test is as follows, but keep in mind there are exceptions to the way the days are counted. Those will be discussed later.
Add together:
- All the days present in the U.S. during the current calendar year
- + ⅓ of the days present in the U.S. in the preceding calendar year
- + ⅙ of the days present in the U.S. during the second preceding calendar year
- = Total days counted for U.S. tax residency
Counting Days of Presence in the U.S.
If the foreign national employee is present in the U.S. during any part of a day (24-hour period), the day counts toward substantial presence. However, there are some exceptions for counting days toward substantial presence:
- Any days the person regularly commutes to work in the U.S. from a residence in Canada or Mexico
- Any days the person is in the U.S. for less than 24 hours in transit between two places outside the U.S. (for example, airline layovers)
- Any days the person was unable to leave the U.S. because of a medical condition that developed while in the U.S.
- Any days the person is present in the U.S. as an "exempt individual"
'Exempt Individual' Rules
A foreign national is an "exempt individual" not permitted to count days toward the substantial presence test if they are present in the U.S. under an F, J, M, or Q student visa, or under a J or Q non-student visa.
- Students under an F, J, M, or Q visa are exempt from counting days for five years.
- Non-student J and Q visa holders (such as teaching, research, trainee, short-term scholar) are exempt from counting days toward substantial presence for two out of the last six years.
For purposes of both the two- and five-year exempt individual limitation rules, the IRS uses a calendar year (January 1 through December 31), not 12 consecutive months. If the person is present in the U.S. as an exempt individual for any part of a calendar year, it is counted as a full year.
For the purposes of determining an exempt individual year for those in a student visa status (such as F-1 and J-1 students), the student is only allowed one five-year time period. Those years do not need to be consecutive but cannot total more than five.
A current J-1 non-student visa holder will not qualify as an exempt individual if they were exempt as a teacher, trainee, non-student, or student for any two of the last six calendar years. The exempt individual rule is applicable to the current visa status at the time the test is applied. For those who have previously entered under both student and non-student status, all the years of exempt individual status, regardless of whether the year was originally applied toward a student or non-student status, should be applied to the total exempt years. In no case can the total of exempt years ever exceed five.
Residency Starting and Termination Dates
The residency starting date is the first day the foreign national was present in the U.S. during the calendar year in which they met the substantial presence test. If the person meets the green card test, the residency starting date is the first day of the calendar year during which they were physically present in the U.S. For those who meet both tests, the residency starting date is the earlier of the two dates.
For the residency termination date, the date that the person's resident alien status terminates is the last day of the calendar year in which they cease to be a U.S. resident for tax purposes (for example, if the last day of residency is September 10, the residency termination date is December 31 of that year).
To determine U.S. residency for tax purposes, see the Substantial Presence Worksheet (pdf).